Sectoral partnership drive in steel sector to pay dividends

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Published: June 18, 2019 12:58:55 AM

Taken together, the repo rate reduction of 75 basis points (in three tranches) in the past months should have impacted positively both the consumption expenditure and investment in the economy.

Sectoral partnership, steel sector, industry news, market news, steel consumption, steel industry, commodity news, Sectoral partnership drive in steel sector to pay dividends

Last week, we had a quick look on the health of the primary user segments for steel demand in the country in the current period. Meanwhile, the mid-term MPC by RBI has declared another 25 basis point reduction in the repo rate in the hope of bringing down the interest rate on credit. It was the right step for two reasons. A lower interest rate helps the household sector have a cut in EMI on loans taken for purchase of vehicles, dwelling places, white goods. It also leads to lower the cost of credit taken for investment purposes or for working capital.

Taken together, the repo rate reduction of 75 basis points (in three tranches) in the past months should have impacted positively both the consumption expenditure and investment in the economy. It all depends to what extent the lowering of the repo rate is translated into lowering of actual interest rate charged by the banks/financial institutions for loans/credits offered by them. It is true that servicing charges by the banks on various functions/ operations have risen in the recent period, which made it imperative for them not to pass on the full benefits of repo rate reduction for the market.

And, therefore, it becomes uncertain and difficult to estimate the incremental impact of lower interest rate on the market. Further, empirically it has been established that there is a lagged impact of reduced cost of credit on the commodity demand.

For sprucing up the demand from the automobile and engineering equipment, packaging and consumer durables segments accounting for around 38% of steel consumption, the driving factors need to be identified and appropriate strategies need to be evolved, which also require a commitment on the part of Indian steel players to play a supporting role like it has recently done to agree to supply steel to engineering exporters at fob export prices of steel categories.

A sectoral partnership approach can be strategised that would pay dividends in the long term as has been successfully proved in other major steel producing countries like Japan, South Korea, China and Europe.

IIP data shows that capital goods that grew by 4.0% and 2.8% in FY18 and FY19, respectively, have clocked 2.5% growth in April. For the sector, the orders from the railways for manufacture of wagons and coaches for the rolling stock procurement targets of the railways for doubling of lines, gauge conversion and DFC as well as for metro coaches are comfortable.

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However a few other segments like pressure vessels, SS tanks, power generating equipments, generators, transformers, furnaces, material handling equipments, cranes, mining, sugar and printing machineries are performing less than warranted. The woes of the capital goods sector can be linked with slower growth in construction of new power projects in thermal and hydro segments. It is also reflected in high negative growth in manufacture of fabricated metal products in FY19 (-9.6% ) and (- 1.5%) in April.

The consumer durable segment that rose by 0.8% and 5.3% in FY18 and FY19, respectively, has clocked a growth of 2.4% in April. During the first two months of the current year, the production of vehicles in the country has gone down by 9.31%, while sales of passenger cars, commercial vehicle, two-wheelers and three-wheelers have all gone down by 18.82%, 8.05%, 11.68% and 6.56%, respectively.

Overall, exports of automobile have gone down by 0.27% during April-May 2019. The slowdown in the auto segment has resulted in slower rise in sales of alloy steel as a significant share of alloy steel production in our country, dominated by the SME units, is accounted for by this sector.

The auto sector in other major countries such as China and Germany is facing subdued demand and abundant uncertainty on account of BIS-VI fuel efficiency norms requiring some changes in the design for higher safety conformance and emergence of EVs on account of environment friendliness. The latter factor signals a paradigm shift in steel demand to much lower volume and higher share of value added products, particularly in the emerging economies. The use of EVs in the three-wheeler segment as an alternate means of public transport is getting popular in Tier-II and Tier-III cities, and in the outer regions of the mega cities in a limited way as the speed of the vehicle remains a concern, although from safety and environment friendliness this mode is preferred. The large players have already expressed their reservation on the changeover as the financial, commercial and human implications due to the switchover are considered enormous.

A few other segments in the consumer durable sector, namely, washing machines, air coolers, passenger cars, auto components, two wheelers, bicycles, steel furniture, SS Utensils are performing at subdued rates and suffer from demand contraction. The lower rate in EMI is yet to make its impact felt strongly in pushing up sales of white goods, although it has generated a mild positive trend in activities in the Housing segment. The budget announcements for infrastructure investment are eagerly awaited and this alone can act as a booster for the steel industry.

(Views expressed are personal)

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